Ant setback signals reckoning for fintech



All eyes in the fintech world were trained on Ant Financial last week, after the Chinese group was dramatically blocked from launching its $37bn initial public offering at the eleventh hour. Theories abounded about the reasons: it was a political slapdown; there were technical shortcomings in the company’s prospectus disclosures.

An additional motive, though, is more fundamental. As Ant has morphed from a tech group that processes payments into a giant credit platform, it has become a potential systemic risk. For regulators, curbing that risk is perfectly sensible.

Around the world, tech-based credit platforms have sprung up in huge volume over the decade since the 2008 financial crisis. Now they face a reckoning amid a looming economic crisis, continued resistance from a reactionary banking market and jitters among both investors and regulators.

In their original incarnation as so-called peer-to-peer lenders, these platforms pushed an iconoclastic idealism. P2P was a way to “democratise” finance by using clever tech to match individuals who had money to invest with individuals who needed to borrow money. Lending — traditionally a business intermediated by heavily regulated banks — would be “disintermediated” by these tech upstarts. Borrowers would get better rates. Investors would too, with P2Ps taking a smaller margin than big balance-sheet banks.

In Britain, Zopa, Funding Circle and RateSetter took off. In the US, Lending Club and SoFi expanded aggressively. In China, which was at the peak probably the biggest P2P market, Dianrong and Lufax led an army of platforms. The laggards and Luddites of the banking sector were set to be left behind.

Except it hasn’t really happened like that. The glow of P2P quickly faded: there were governance scandals for some, elusive profitability for most. And for virtually all, there was a pragmatic shift away from the purist idealism of the retail P2P model towards a reliance on institutional funding, supplied by asset managers and, ironically, banks.

A moment came this past August: the lossmaking British peer-to-peer lender RateSetter — one of the world’s last significant pure-play P2Ps — collapsed into the arms of struggling bank Metro after failing to raise fresh capital.

Similar market forces and regulatory pressure are being felt around the world. A clutch of prominent fintech lenders in the US — Lending Club, SoFi, Square — are now converting into banks. This join-them-if-you-can’t-beat-them attitude partly reflects the realisation that in times of stress customers will be keener to put their money into insured deposit-takers than pure fintechs.

This principle applies in Ant’s case, too. Given the pace of its expansion and the economic disruption caused by coronavirus, its role as a financial innovator has set nerves jangling. That is all the more true because China’s own painful experience with pure-play P2P is still raw. Thousands of platforms engaged for years in often irresponsible and aggressive lending. Since then, the government has gradually cracked down, with tighter rules and enforced closure of many platforms.

Regulators may also be hearing echoes of the 2008 crisis. That international financial meltdown was caused or at least compounded by the invention by investment banks of “collateralised debt obligations”, which involved packaging up loans and selling them on to other investors. Regulators’ response was to demand the banks keep some “skin in the game”, so that they had a reason to care about the quality of the debt in their CDOs. The core demand of China’s new fintech regulations relies on a similar logic — it would force Ant to keep 30 per cent of its lending on balance sheet, instead of farming out virtually all funding — and risk — through banks and securitisations.

For all the pressures, though, it would be foolish to write off the fintech lenders. In many cases, especially in China and across Europe, their technology is genuinely superior to that of the banks.

And contrary to the fears of investors and regulators, the credit performance of some alternative platforms is not really looking any worse than the banks they compete with.

Fortunes may dip, of course, when governments start withdrawing their financial assistance programmes, or if a full-blown economic crisis takes hold. At the same time, some of the regulatory arbitrage that fintechs have enjoyed will rightly be eroded. But fintechs will rise again, with luck avoiding a big blow-up along the way.